S&P: Junk Bond Credit Quality Now Past Cyclical Peak

By Michael Aneiro

Standard & Poor’s says on Tuesday that the credit quality of the U.S. speculative-grade bond market has passed its peak in the current credit cycle.

“We expect to see diminishing credit quality as the cycle continues,” said Diane Vazza, head of S&P’s global fixed income research. “The U.S. speculative-grade bond market has strong technicals such as record-low yields, high issuance, and tight spreads, but we also see rising defaults, increasing downgrades, and companies facing potential macroeconomic headwinds as fundamental credit quality declines.”

S&P points out that the demand for speculative-grade debt remains robust, as the Federal Reserve continues to pursue an open-ended asset purchase program, which has been spurring investors to seek yield through riskier assets. But S&P says this may also prolong the stage of the cycle where issuance “becomes frothy with lower quality issuance.”

As credit quality is reaching its peak for the current cycle while the market remains strong with record-low yields and high issuance volumes, Vazza advises that “credit analysis of individual companies and issues is paramount for investors under these credit conditions.”

The latest read on the Bank of America Merrill Lynch High-Yield Master II Index shows an average junk-bond yield of 6.34%, at 5.5 percentage point average spread over Treasuries and an average dollar price of 103.81 cents on the dollar. The junk bond market has returned 12.51% in 2012 to date.

Copyright 2016 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit